Further falls in income across the distribution in 2011–12

The Department for Work and Pensions (DWP) has published its annual statistics on the distribution of income in the UK. The latest data cover years up to and including 2011–12. IFS researchers published a detailed report, funded by the Joseph Rowntree Foundation (JRF), on what these data tell us about living standards, poverty and inequality in the UK. In this observation, we briefly highlight some of the key findings from DWP’s report.

Average incomes

Average incomes fell for the second successive year in 2011–12. Official statistics recorded a reduction of 3% at the median (middle) and 2% at the mean, after accounting for inflation (measuring incomes before deducting housing costs, BHC). This comes on top of large falls in 2010–11, leaving median and mean income 6% and 7% below their 2009–10 peaks respectively.

These large post-recession falls in average incomes follow a period of slow growth that began in the early 2000s, far pre-dating the recession. The net result is that the official measure shows both mean and median income in 2011–12 no higher than in 2001–02, after adjusting for inflation.

However, it is important to bear in mind that these statistics make real-terms comparisons of incomes over time using an inflation measure based on the retail price index (RPI). The Office for National Statistics (ONS) now acknowledges that RPI inflation overstates the true rate of inflation facing households, and that this problem has got worse since 2010 (see here). The DWP has (sensibly) indicated that it is therefore reviewing the measure of inflation used in its income statistics. This is potentially important. If one were to adjust incomes using the new RPIJ index – which does not suffer from the same technical problems as the standard RPI – then recent trends in real incomes would still look bad, but slightly less so.

According to the RPIJ, real median income fell by 4% between 2009–10 and 2011–12 (compared with 6% according to the RPI) and real mean income by 6% (compared with 7% according to the RPI). On this basis, real median income in 2011–12 had fallen back to the level last seen in 2004–05 and real mean income to the level last seen in 2005–06 (rather than 2001–02 in both cases using the RPI).

Income inequality

The falls in incomes in 2011–12 were of similar (proportionate) magnitude across the income distribution. Income inequality was therefore essentially the same as in the previous year.

But inequality was substantially lower in 2011–12 than it was before the recession. Between 2007–08 and 2010–11, the incomes of lower-income households had held up better than the incomes of higher-income households. This is largely because, over that period, real earnings fell whereas benefit entitlements grew roughly in line with prices.

In work published recently, projections by IFS researchers suggested that the reduction in inequality between 2007–08 and 2011–12 will be temporary, and will have been almost unwound by 2015–16. This is because, if the Office for Budget Responsibility’s (OBR’s) forecasts are correct, most of the falls in real earnings had already occurred by 2011–12, whereas a number of cuts to the working-age welfare budget are being implemented over the current parliament.

Income poverty

In 2011–12, the numbers in absolute poverty (defined as having a household income below 60% of the 2010–11 median, with incomes measured BHC) rose from 9.8 million to 10.8 million – its highest level since 2002–03 – but relative poverty (defined as having a household income below 60% of the contemporary median, with incomes measured BHC) was broadly flat. This is because incomes fell by similar proportionate amounts for all income groups in 2011–12, so low-income households became worse off in absolute terms, but maintained roughly the same position relative to middle-income households.

However, relative poverty was substantially lower in 2011–12 than it was before the recession in 2007–08, having fallen from 11.0 million to 9.8 million to reach its lowest rate (16%) since 1986 (again measured BHC). This reflects the more general reduction in income inequality between 2007–08 and 2010–11 highlighted above. The reductions in relative poverty have been particularly large among pensioners and children. Relative child poverty in 2011–12 is at its lowest level since the mid-1980s, having fallen by about one-quarter since 2007–08; the rate of relative pensioner poverty has fallen by more than one-quarter over the same period, from 23% to 16%.